Texas regulator drops effort to force oil production cuts

A Texas regulator has dropped an effort to use decades-old state rules to force oil producers to cut output in order to boost crude prices after running into opposition from leading energy companies.

The Texas Railroad Commission, which regulates oil and gas in the state, was to have considered the proposal at a hearing on Tuesday, but was now likely to pass on the matter, people at the commission said.

The proposal would have resurrected rules giving the commission, known as the Texas RRC, the authority to “proration” supply to prevent “waste”. In this case, most operators would have been forced to cut 20 per cent of their output or pay fines on any excess barrels.

The unusual prospect of Texas regulators cutting production surfaced six weeks ago as President Donald Trump urged Russia and Saudi Arabia to agree to an Opec deal to cut their own supply to prop up oil prices devastated by the global slowdown.

Ryan Sitton, the RRC commissioner who proposed the idea, spoke with Opec and Russia’s energy minister about cuts in March, and said at the time that Texas could offer “a bargaining chip” for Mr Trump in negotiations with Riyadh and Moscow.

Saudi Arabia and Russia’s landmark deal to cut supply by almost 10m barrels a day, or 10 per cent of the world’s total, came on April 12. The RRC held a preliminary hearing to discuss Texas’s proposed cuts on April 14.

On Monday, a day before the final hearing, Mr Sitton dropped his support for the proposal, saying the moment had been missed. Of the three RRC commissioners who would have voted on the proposal, only Mr Sitton supported the cuts.

“I don’t think there’s anywhere for it to go,” Mr Sitton said, adding that the idea’s opponents had deliberately slowed down the commission’s deliberations, despite evidence of a rapidly collapsing oil sector.

“There’s just nothing for us to do. The politics of the situation has trumped the data of the situation.”

Prorationing had some support among operators. Parsley Energy and Pioneer Natural Resources, two large independent oil producers in Texas, wrote to the RRC in late March, calling the proposal an opportunity to “jump-start an international solution” to an “extraordinary, unforeseeable crisis”.

But the idea had strong opponents, including the American Petroleum Institute, the industry’s most powerful lobby group in Washington. Last month, it called on Texas to reject a “quota system imitating Opec” that would “only penalise the most efficient producers”.

Texas’s oil production is already falling steadily as producers idle rigs in the face of a demand collapse caused by coronavirus lockdowns. On Friday, Exxon and Chevron both said they were winding down activity and shutting some wells. Independent producers are doing the same.

The US oil benchmark, trading at about $20 a barrel on Monday, is down 70 per cent since January and traded below zero one day last month.

Texas produced 5.4m barrels a day in February — more than 5 per cent of global supply and more than any member in the Opec cartel except for Saudi Arabia. But output had already dropped by about 700,000 b/d, Mr Sitton said in an interview.

Production from shale wells plunges in the first year after coming on stream, so operators must keep drilling more wells to hold overall output steady. Conversely, any cessation leads to a swift fall in production. Consultancy Wood Mackenzie thinks total US oil output could drop by as much as 3m b/d by the end of 2020, from 13m a few months ago.

Analysts said the price fall would enforce production cuts anyway. “The market is operating on a timescale needed to ratchet down supply that policy could not — even if it wanted to,” said Jason Bordoff, head of Columbia’s Center on Global Energy Policy.

Mr Sitton said his idea would have enabled a more orderly winding down of production — had it been adopted soon enough. Up to 300,000 jobs would now be lost in Texas because of the chaos, he forecast.

“The level of decimation is a lot higher than it would have been if we could have managed through this with some sort of thoughtfulness,” he told the FT. “Trying to manage this down is what I was doing.”

In a statement, Matt Gallagher, Parsley’s chief executive, said he was disappointed that the RRC “had an opportunity to lead and bring a level of stability to the market chaos and is choosing not to act”.

Bob McNally, head of Rapidan Energy Group and author of a book on the RRC and Opec, said the commission’s willingness to consider quotas 48 years after its last bout of prorationing showed the severity of Texas’s price bust.

“But the current RRC is not eager to jump back in the quota business, preferring to let Opec do the mandatory cutting and market forces sort out the rest.”

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